Barbara Easter and her husband will be long past retirement age by the time the debts their outdoor events company, Cotswold Marquees, incurred to survive the pandemic are expected to end.
This month, their bank will start asking for refunds – and that’s not their only concern. Some salaries will need to be covered again as leave support declines. Business rates will resume. They now take “one day at a time to pass,” Easter says, with questions about how many events will take place this summer.
Easter is among thousands of UK business owners facing the financial fallout from the pandemic, as concerns grow over whether the government’s efforts to keep the economy afloat will be enough.
Ministers based their hopes on a consumer recovery supporting a broader business recovery. But many companies such as Cotswold Marquees are struggling financially after the past 18 months, with lockdowns erasing reservations and still limited or moderate trading.
“A rising tide lifts all boats – the economy is going through a mini boom, driven by consumers and pent-up demand,” said Stephen Welton, executive chairman of BGF, one of the UK’s most active investors in small businesses.
“But how long is this going to last?” If the tap [of government support] is extinguished at the same time as these companies carrying huge accumulated debt try to start, it becomes quite problematic. “
Bankers have also sounded the alarm. In a recent meeting with the prime minister, they warned of a potential “debt time bomb,” according to people familiar with what has been said.
More than £ 75bn has been borrowed by businesses under Covid loan programs – the majority by 1.5m companies who have taken out light bounce loans.
“It’s definitely going to be complicated and the next six to nine months will be where it happens,” said a senior banker. “It won’t be a single tidal wave, but even if the economy recovers, negative news will come and you need to be ready with the iron hats.”
In a series of data dumps in recent weeks on an EU website – mandated by Brussels state aid disclosure rules – the government has listed the names of tens of thousands of companies charged new debts.
Some on the list are well known. But more telling is its predominantly parochial majority, with dozens of dentists, golf clubs, take-out and opticians and other small businesses in the city that would only be familiar to local customers.
Bankers have also expressed their concerns about this debt to Treasury officials. “Colleagues at the Treasury are very sensitive to it,” said one banker. However, whether or not the government finds an additional appetite to help is in question. “What ends up happening will be a political judgment,” he said.
The initial repayment of Covid loans was positive, bankers said, with only a “single-digit” percentage of borrowers failing to cover interest on the initial tranche of rebound loans in June, according to two senior executives familiar with industry-wide reports.
It’s better than some feared. But bankers say it is too early to judge the impact the need to repay this debt will have when combined with a slew of other new costs that will accumulate as debt support programs. Covid will end.
“All of this is not a gift, his support and will have to be untied,” said Steve Russell, head of corporate restructuring services at PwC, the accounting firm. “The pressure will start to mount and many of these businesses will need to be restructured. And that will lead – unfortunately – to more companies going bankrupt. “
The government has delayed several financial pinch points: extending a moratorium on commercial rents and banning Covid-related liquidation orders. HM Revenue & Customs is committed to taking a benevolent approach to unpaid taxes, and loan repayment terms can be extended for up to 10 years.
But other support starts to wane this month, and business leaders fear it may have happened too soon. Last month, the Federation of Small Businesses wrote to Kwasi Kwarteng, Business Secretary, warning that “the debt burden facing small businesses is a huge challenge for the UK’s economic recovery”.
In the letter seen by the Financial Times, the group said: “At best, debt linked to Covid will prevent companies from investing in order to innovate or improve productivity. At worst, it will lead to the bankruptcy of a significant number of otherwise viable businesses. “
Mike Cherry, national president of the Federation of Small Businesses, warned of “a real economic flashpoint on July 1,” adding: “This is the time when holidays will start to drop, business rates will return. for hard hit sectors in England, and deferred VAT payments will become due.
Cherry said four in ten FSB members in debt said borrowing levels were “unmanageable” last year. “As support is withdrawn, rebound loan repayments will start to weigh in. “
The level of insolvency has reached historic lows throughout the pandemic, but experts are wondering how long it can last. Mark Phillips QC, an expert in insolvency law, said many companies are heading for a financial cliff.
“If every creditor demands 100% of their debt and most creditors will need the money, we could see thousands of businesses go bankrupt,” he said.
Phillips worked with R3, the professional body for insolvency practitioners, to obtain free advice for businesses.
Business groups have called for additional financial support throughout the stages of unblocking the economic recovery. BGF’s Welton believes there will also be a need for a more formal system of recapitalizing small, debt-ridden businesses.
But those calls appear to have failed given the hard line taken in Kwarteng’s recent interviews. “The leave was not going to last forever and as we are opening in two weeks it is a good time to think about the pay balance the government pays and employers pay,” he told BBC radio last week.